Friday, September 26, 2008

Yesterday the government seized the assets of Seattle's Washington Mutual (WM,) affectionately known as WaMu. At the same time, the government brokered an emergency sale of most of the assets to JP Morgan Chase (JPM.) The deal saves taxpayers and FDIC from another loss as JPM assumes the risk in exchange for the assets at a bargain basement price. WaMu customers should not be affected while shareholders and some bondholders will get nothing.

The failure of Seattle's Washington Mutual is the largest bank failure in History.

We knew Washington Mutual was in trouble because it has appeared high on the survey of "Best CD Rates" where it had the highest 5-year CD rate, currently at 5.0%, for some time. Troubled banks are paying high CD rates to attract capital at far better rates then they can get on Wall Street. For example, AIG is paying LIBOR plus 8% and 80% share dilution to the Government. The current LIBOR rate is 3.46% so AIG is paying more than double the rate WaMu pays for CDs. I suspect WaMu will continue to offer high rates to keep customers during the transition to JP Morgan Chase.

WaMu was also #14 on "Dick Bove's List of Banks In Danger of Failing" under the category of "non performing assets as a percentage of equity" so we had plenty of warning in advance. Someone close to me cashed in their WaMu CDs last week, paid the penalty, reinvested $99,000 at WaMu for total FDIC protection of principal and interst until the dust settled then invested the remainder of the money in a new bank for to get full FDIC protection. The government acted before more people pulled their money out and created another run on a bank.

Jamie Dimon, Chairman and CEO of JP Morgan Chase said, "We think this builds a great franchise for us....We are building this franchise for the long term, not next year or the next five years but the next one hundred years."

Merrill Lynch: "The strategic fit is good and exactly what the company has long articulated it wanted, at a knock-down price which manages the risks. "

Disclaimer. I own and trade XLF, the financial sector ETF, around a core position that is well in the money for both my personal portfolio and "Kirk's Investment Newsletter Explore portfolio," even after the recent decimation of the financial sector.

Thursday, September 18, 2008

The Wall Street Journal reported that stable-value funds are under scrutiny by worried investors with 401(k) and 529 plans that offer this option.

Article excerpts:

It's not just money-market funds that are being scrutinized. Many 401(k) plan participants and employers are fretting about stable-value funds. These products, which are generally available only in defined contribution and 529 plans, typically invest in high-quality bonds and bank or insurance-company contracts that guarantee the value of the principal and offer relatively high interest rates compared with money-market funds.

The troubled insurance giant AIG is a major player in stable-value funds. The company is a provider of "wrap" contracts that protect the funds against loss of principal. AIG wraps roughly 10% of the stable-value fund assets tracked by Hueler Analytics, a stable value research firm. And that has many investors on edge.

But investors shouldn't lose much sleep over the developments at AIG, stable-value experts say. In stable-value wrap contracts, the fund assets are not held in the insurance company's general account. They're owned and controlled by the plan. And in stable-value funds that hold AIG wraps, AIG would typically be just one of many wrap providers. "If something were to happen to one of those wrap providers, it doesn't really change anything in the stable-value portfolio other than the manager has to decide to reallocate those dollars to a different wrap provider," says Kelli Hueler, CEO of Hueler Analytics.

Could these stable-value experts be related to the experts who missed the housing bubble and the effect its bursting would have on Wall Street financial firms such as AIG? I hope not.

Fidelity defines a Stable-Value Fund as:

A stable value fund generally invests in investment contracts, certain types of fixed income securities (e.g., U.S. treasury bonds, corporate bonds, mortgage-backed securities, bond funds), and money market investments. While the stable value fund tries to maintain a stable $1 unit price, the fund cannot guarantee that this unit price will be maintained and its yield may fluctuate. The goal of the stable value fund is to preserve the participant's principal investment while earning interest income.

Mortgage backed securities are behind the melt-down on Wall Street!

I don't own any stable-value funds because I have never wanted to "trust an insurance company" to stay in business for me to have a good retirement. I use CDs, TIPS, GNMAs, Treasuries and a total bond fund for my core and explore portfolios.

The Wall Street Journal reported that Reserve Primary Fund, a money market fund, "broke the buck" when it traded at 97¢. The Journal believes this was an "isolated incident" from their survey of analysts.

Article excerpts:

Reserve Primary Fund "appears to be an outlier," says Peter Crane, who tracks money funds. "People got worried that Reserve wouldn't be able to bail the fund out, so they started running." The Reserve Fund, which had assets of around $62 billion on Friday, had dropped to about $24 billion on Tuesday.

...on the heels of the Primary Fund's announcement, other fund companies, such as Vanguard Group, American Century Investments and Charles Schwab Corp., have posted notices on their Web sites assuring investors that none of their money-market funds hold any securities issued by Lehman or American International Group Inc.

I wonder if this is the same group of analysts that missed the housing bubble and the effect its bursting would have on Wall Street financial firms. I hope not because I own money market funds in both my core and explore portfolios at several major firms I trust.